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Asia's Private Equity Sector Grows But Outlook Gets Cloudier - Bain & Co

Tom Burroughes

18 March 2019

The Asia-Pacific region has surged as a private equity region, chalking up $883 billion of total assets under management - it now accounts for 26 per cent of the world’s total PE market, up from only 9 per cent a decade ago, a report finds. But some data is flashing red warning signs, it says.

US-China trade arguments, rising interest rates and other forces, however, provide potential challenges and headwinds for this sector, according to Bain & Company’s annual Asia-Pacific Private Equity Report.

Deal value across Asia-Pacific peaked at $165 billion in 2018, above $159 billion from a year earlier and 48 per cent greater than the past five-year average. China and India dominated deal-making last year, making up almost 75 per cent of total deal value. Exit values also hit an all-time high, reaching a record $142 billion in 2018 - up by 39 per cent over the past five-year average.  

However, the total number of exits declined sharply to 402, down by 32 per cent from the past five-year average. Large exits dominated - exits of $1 billion or more were almost 60 per cent of total exit value, and the average exit value doubled to $353 million compared with the average for the previous five years, said.

Around the world, private equity as an important portfolio holding has gained ground with wealthy clients, because it offers superior returns compared with conventional listed equities. The higher returns, however, come with less liquidity. Another factor, according to research firms such as Preqin, is that there is more than $1.0 trillion of unspent capital, popularly known as “dry powder”.

Although a core of large and experienced funds raised capital with ease, overall Asia-Pacific-focused fund raising fell in 2018, following a record high in 2017, sliding by more than 50 per cent to $75 billion, or 34 per cent below the previous five-year average.  China’s move to enforce more stringent policies on wealth management products to improve transparency and reduce financial risk, together with a record level of dry powder – $317 billion or three years of future investment – after raising ever-larger funds in recent years, significantly curbed fundraising.

“Over the last several years, private equity in Asia-Pacific seemed to be unstoppable, and 2018 reinforced that trend in terms of record-breaking deals and exit values. But we’re seeing warning signs that suggest the party may be coming to an end, at least for some investors,” Kiki Yang, who leads Bain & Company’s private equity practice in Asia-Pacific, said.

“The increasing market bifurcation and gathering macroeconomic headwinds that we’ve hinted at in the past are starting to materialise, potentially slowing the revenue growth and multiple expansions that have historically propelled Asia-Pacific PE returns. This means that vulnerable and less differentiated funds could disproportionately bear the brunt of a downturn,” it said. 

Cause for concern
The report said there are three “disconcerting” market developments. First, US-China trade tensions have increased the risk of macroeconomic disruption in China and across the region. At the same time, deal prices have remained high but interest rates are rising steadily after a period of decline, a trend that will increase the cost of funding and could put a brake on future multiple expansion.

“Third, and perhaps most worrying, the region’s private equity market has become sharply polarised between large funds with strong track records that dominate activity across the region, and smaller, less experienced funds that are having difficulty raising funds and exiting,” it said.

According to Bain & Company data, the number of exits of companies sold for less than $100 million plunged to 205 in 2018, down by 58 per cent from 493 in 2017. By contrast, the number of exits larger than $500 million rose by 26 per cent to 59.

“The impressive headline figures for the Asia-Pacific PE market in 2018 mask the emergence of a winner-take-all dynamic,” Yang said. “With the risk of global recession and other macroeconomic challenges, we expect the market for exits will only get tougher.”